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Openness to Trade and the Potency of Monetary Policy: How Strong is the Relationship?

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Author Info

  • Georgios Karras

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Abstract

Economic theory suggests that an economy's openness to international trade reduces the ability of monetary policy to affect output. Using quarterly data from the 1960:1–1993:4 period for a set of eight countries (Australia, Canada, Germany, Italy, Japan, South Africa, the U.K., and the U.S.A.), this article's empirical results support this theoretical prediction: the more open the economy, the smaller the output effects of a given change in the money supply. This finding, robust across all the different specifications and estimation methods examined, has straightforward implications for stabilization policy. Moreover, it suggests that an economy's net benefit from joining a monetary union is increasing with the economy's openness to foreign trade. Copyright Kluwer Academic Publishers 2001

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File URL: http://hdl.handle.net/10.1023/A:1026559010374
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 12 (2001)
Issue (Month): 1 (January)
Pages: 61-73

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Handle: RePEc:kap:openec:v:12:y:2001:i:1:p:61-73

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: openness; monetary policy; monetary union;

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  1. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
  2. David Romer, 1991. "Openness and Inflation: Theory and Evidence," NBER Working Papers 3936, National Bureau of Economic Research, Inc.
  3. Frederic S. Mishkin, 1982. "Does Anticipated Monetary Policy Matter? An Econometric Investigation," NBER Working Papers 0506, National Bureau of Economic Research, Inc.
  4. Turnovsky, Stephen J, 1981. "Monetary Policy and Foreign Price Disturbances under Flexible Exchange Rates: A Stochastic Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(2), pages 156-76, May.
  5. Cover, James Peery, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1261-82, November.
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